Shopaholics stay away from SW 1

With hindsight, comparing Harrods to Enron was probably not a good idea. And what stemmed from a joke is now the subject of a big libel action brought by the litigious Mohamed al-Fayed.

The Egyptian tycoon was incensed after the Wall Street Journal ran a story about Harrods headlined: 'The Enron of Britain?' The article was published after the respected newspaper had been taken in by an April Fool's joke press release from Fayed suggesting he was going to float his store. Further details on a website confirmed Fayed was merely considering floating a Harrods branded store on a canal boat. Dow Jones publisher of the WSJ argues its article was also intended to be humorous, but for Fayed jokes about the financial state of his empire are no laughing matter.

The simple fact is that Harrods is not doing as well as it once did. Like most of Knightsbridge's most exalted retailers, it is feeling the economic downturn as a combination of thinner wallets and the spectre of global terrorism keep tourist numbers down.

The true picture of Harrods' current financial position is difficult to ascertain, but what is irrefutable is that in the 12 months to February 2002 (the most recent figures available) Harrods' retailing arm saw pre-tax profits (stripping out exceptional items) slide to £22 million, compared with £30.5m the previous year. A near 30 per cent drop in core profits is not a brilliant result for any company, but for Fayed the slide will be felt even more acutely.

Along with his brother, Ali, Fayed receives tens of millions of pounds each year in the form of dividends from the Harrods empire. Much of this is ploughed into other Fayed projects. For example, he spent approximately £14m on Punch magazine before pulling the plug. Fulham Football Club is thought to have swallowed at least £80m of his cash.

Given the huge demand for cash from his other interests, plunging profits at the flagship store are a headache. This is especially the case considering that Harrods Holdings, the parent company, needs to make more than £20m worth of interest payments to the Royal Bank of Scotland each year, the result of a mortgage taken out on the Knightsbridge property. Factor in a recent change of heart by the Inland Revenue, which has cost Fayed his special low-tax status, and it is clear the retail downturn could not have come at a worse time.

Things have not been helped by a sustained exodus of key management. Only last month Max Rigelman, Harrods' managing director, quit after just two months. His predecessor, Martha Wikstrom, left in February and last year finance director William Najdecki resigned 'by mutual agreement'. Over the past two years more than a dozen directors of Harrods and its associated companies have parted company with Fayed. Auditors PricewaterhouseCoopers resigned last year.

With predators circling Harrods, Fayed must be tempted to sell out. Now ensconced in Geneva, he cannot run the store in a hands-on way, so realising a tidy profit might make sense.

He once mooted the idea of floating the company, possibly on the New York Stock Exchange, but this idea went the way of the bull market, leaving Fayed with little alternative but to find a buyer if he wants to cash in his chips.

To do so, though, would be to allow interested parties to spend hours scouring the finer details of Harrods' accounts. And unpicking the various mortgages attached to his empire would prove complex and might deter bidders from paying what Fayed believes Harrods is worth.

Nevertheless, there is a feeling - perhaps completely unfounded - among Harrods' observers that things are changing within the Fayed empire.

In April, he raised millions by remortgaging his London home, 60 Park Lane, via a complicated deal involving Harrods Holdings, Ali, a Lichtenstein-based company, Establissment Wallon, and the Bradford and Bingley bank. Fayed has also been cutting back on some non-retail interests. First went Punch, then came a focus on trimming Fulham's costs. Only last week it was revealed that Fayed is suing a law firm for £8.8m for its work in relation to his acquisition of the club. His legal advisers say London solicitors Nicholson, Graham & Jones 'did not act in accordance with instructions in drafting the terms of the contract and, as a result, Fayed has incurred greater costs than he should have done'. NGJ deny the claim and say they will vigorously contest the action.

Other interests which may be trimmed could include Harrods' helicopter service and its airport stores.

Lawsuits, financial engineering, rows with the tax man: Knightsbridge would be a duller place without Fayed.